Fiduciary “Harmonization”: No Quick Task

Securities and Derivative Litigation   |   December 1, 2013
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Progress on harmonizing the standards of conduct applicable to those who provide investment advice is measured (at best):

Securities and Exchange Commission

  • Though Chairperson Mary Jo White is not predicting when the SEC might propose regulations concerning the standards of conduct applicable to broker-dealers (BDs) and investment advisers (IAs), she has affirmed that this is a “major focus.” Nevertheless, the SEC’s published regulatory agenda for 2014 schedules the matter for “long-term,” rather than highest priority, action. The SEC is still considering responses to its March 1 request for cost-benefit data and other input (see “Dearth of Data on Uniform Broker-Dealer/Investment Adviser Standard” in Expect Focus, Volume III, Summer 2013).
  • The SEC’s Investor Advisory Committee has adopted a recommendation that personalized investment advice that either a BD or an IA renders to retail customers be governed by an enforceable, principles-based requirement to act in the customers’ best interests. The committee’s preferred means of achieving this would be to narrow the Advisers Act BD exclusion, such that a broader range of advisory services would require a BD to register thereunder. Alternatively, the committee recommends that the SEC adopt an enforceable, principles-based fiduciary standard by separate rule that would apply equally to BDs and IAs.

Under either alternative, BDs would retain the ability to offer transaction-specific recommendations compensated through commissions, so long as adequate disclosures are made regarding sales-related conflicts of interest and those conflicts are appropriately managed.

The committee also recommends that the SEC mandate a plain English disclosure document for customers that outlines the material contours of the client relationship, including the nature of services offered, fees and compensation, conflicts of interest, and disciplinary record. Both BDs and IAs would be required to provide this document.

Some aspects of the committee’s recommendations are stirring controversy, however, and, in any event, it is not clear what action, if any, the SEC will take with respect to the recommendations.

Department of Labor

  • Since withdrawing its original proposal to redefine “fiduciary” under Section 3(21)(A) of ERISA, the DOL has worked to repropose a more surgically drafted definition that will have fewer unintended consequences for retirement investors and less potential for conflict with intersecting regulations. Some weeks ago, Assistant Secretary of Labor Phyllis Borzi countermanded a previously announced timeframe for issuing a reproposal, and the DOL’s 2014 priority list now projects such a reproposal in August. Ms. Borzi has confirmed that issuing a rule is her “number one regulatory priority” and that any proposed regulation will involve IRAs, will amend existing prohibited transaction exemptions, and will preserve commission-based compensation in some form.
  • The DOL also has responded to concerns of swap dealers and major swap participants that they would be deemed “fiduciaries” under ERISA as a result of certain business conduct standards that, effective April 2012, the Commodities Exchange Act has imposed on their dealings with counterparties, including ERISA plans. In this connection, the DOL confirmed its intent not “to impose fiduciary obligations on persons who are merely counterparties to plans in arm’s length commercial transactions.” Ms. Borzi has assured that any redefinition of “fiduciary” will be carefully harmonized with CFTC standards.


  • The House of Representatives has passed a bill (The Retail Investor Protection Act, or RIPA) that would preclude the DOL from redefining the term “fiduciary” under ERISA until 60 days after the SEC issues a final rule relating to a uniform fiduciary standard for BDs and IAs. RIPA would also require that the SEC, prior to promulgating any final rule, conduct new layers of cost/benefit analysis relating to the different standards applicable to BDs and IAs.
  • A Senate companion bill to RIPA has not been introduced. However, ten Democratic senators sent a joint letter to the OMB, dated August 2, 2013, urging that the administration delay any DOL proposals until the SEC has completed its work.

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